"When bad men combine, the good must associate; else they will fall, one by one, an unpitied sacrifice in a contemptible struggle." Edmund Burke

August 16, 2008

What Happens Next?

* By Polar Bear

We are all addicted to forecasts. The soothsayer, the oracle, and the entrails of chickens played their allotted role in supposedly divining the future in more primitive times. Today, we may laugh at these displays of superstition. Yet, we seem to take seriously those "experts", who purport to make forecasts of climate change over the next thirty years, or of the economy and financial markets over the next twelve months, or even two years.

Our reverence for these "experts" assumes a form of "cognitive dissonance". A guru may make ten forecasts, of which, one or two turn out right. He is hailed as a genius. Alternatively, a market economist may make forecast of recovery, say in the housing market, in early 2009. What if he turns out to be wrong? Does it matter? By the time we get there, people will have forgotten the forecast, made six months or more earlier, and the very same economist can make another optimistic forecast further down the track. What should be understood is that the forecast may be primarily a form of communal therapy or reinforcement of received ideas. Accuracy is strictly secondary.

The simple reality is that nobody can know what will happen tomorrow. We cannot see around corners. In that sense, forecasting is nonsense. All that the experts can do is to extrapolate from the present. The real task is to understand what is really happening, here and now.

In previous posts, I have only looked at current trends. I look to the past to glean what could happen in the future.
To take examples. The clear downtrend in the Shanghai Composite Index belies the optimistic forecasts for the Chinese economy over the next few years with clear implications for our resource sector.